(AMZN) Archives

The Market Outlook for the Week Ahead, or It’s All About the Numbers

I know that not all of you are mathematicians, nor blessed with math degrees from UCLA, as I am. However, the future of your retirement funds relies on a few simple numbers. So, I will try to be gentle.

S&P tech stocks are trading at a 27 price earnings multiple. The S&P 500 Index, as a whole, trades at a 21 multiple. S&P value stocks, financials, and old-line recovery stocks like industrials and materials are trading at a 17 multiple.

Historically, companies with double the earnings power of the index trade at a 5-point premium to the main market. As long as this disparity exists, tech stocks will go down and value with go up.

However, we are getting close to a reversal. Allowing for market noise, I don’t see tech dropping more than 10% from here over the coming months. Then we will see the mother of all Q4 rallies taking it to new highs.

That explains why investors have been nibbling on tech lately, especially the best ones like NVIDIA (NVDA), Applied Materials (AMAT), and Salesforce (CRM). You also want to pick up big cap money machines like Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), and Facebook (FB). Their LEAPS are begging for attention.

That means the downside from here is limited. Sorry Cassandras, no crashes here.

I am more convinced of this outcome than ever, given the substantial number of crashes and disasters, markets have weathered this year. These are truly Teflon markets. Last week, Bitcoin collapsed an amazing 55% in six weeks, wiping $1 trillion off the value of that market.

The fear had been that a crypto crash of this size would ignite a system contagion that would take everything down. A few years ago, it would have. But with massive Fed liquidity and unprecedented deficit spending, all we got was down 600 points one day and 600 up the next.

No crash here.

We’ve also had smaller crashes in sectors that were the most egregiously overpriced in February, like SPACS, meme stocks, and shares trading at 100 times sales with no earnings. Again, no harm no foul. It was a comeuppance that was well earned.

The big tell that I am right came screaming loud and clear last week from the US dollar, which hit a new 2021 low. A cheaper greenback means cheaper US stocks for foreign investors, which means they buy more of them. A weak buck also means that interest rates will stay lower for longer, which is great news for stocks, especially tech.

So, take it easy for the next few months. Keep positions small and rejoin the human race.

It seems odd going out into civilization and seeing live people walking around without masks. All the batteries on my watches are dead, as they have not been used for nearly two years, so they are getting replaced. I walked into my closet, and it was like adventuring into an archeological dig, with dozens of Turnbull & Asser shirts untouched by human hands. I’ve been living in Marine Corps sweats since 2019.

Bitcoin Crashes, down 33% on the day at the lows to $30,000, and off a heart-palpitating 55% from the April high. You wanted volatility, you got volatility! The problem for the rest of us is whether this will cause a real systemic financial crisis, with the Dow already down 560 at today’s low. Was Elon Musk the shoeshine boy giving tips at the market top?

Chip Shortage causes $110 Billion in US Car Industry Sales, in 2021 and will take years to address. Supply chains will need to be rebuilt. My neighbor just had to wait 11 months to take delivery of his Ford F-150.

China’s Industrial Production Slows, from 14.1% in March to only 9.8% in April. That gives us a hint to our own future, as the Middle Kingdom emerged from the pandemic a year before we did. Retail sales also disappointed. After rocketing in 2020, the Chinese economy started slowing at the beginning of this year. The dead cat bounce in the economy is over. If this continues, it's bad news for copper prices of which the Middle Kingdom is the largest producer. If (FCX) closes under $40, stop out of all short-term longs immediately.

Housing Starts Dive, as builders run out of materials at reasonable prices. It gave the Dow Average a punch in the nose worth $220. Single family homes took the big hit, down 13.4% to 1.08 million. Permits are still up 70% YOY from when Covid completely shut the industry down. This is the most inflationary sector of the economy right now but barely registers in the CPI numbers. Prices must go even higher for frustrated buyers which are accelerating their rate of increase. Builders are including contingency clauses that allow price rises after the sale, a first. The South has dominated in starts where the population is moving and took the biggest hit. Buy (LEN), (KBH), and (PHM) on dips.

Existing Home Sales Drop 2.7%, in April to 5.85 million units. Inventories are down 20% YOY to only an unimaginable two-month supply. There’s nothing for sale. With the strongest YOY price gains in history, there is nothing for sale. It’s all about high prices, high prices, high prices. Homes over $1 million are up an incredible 214% YOY. The 70-year migration from North to South continues, costing democrats 5 seats in the House. Millennials are entering their peak home-buying years and that $150,000 four-bedroom home in Savannah, GA doesn’t look so bad.

Bitcoin is the Most Crowded State in the World, according to a survey of investment managers. That may explain the 35% plunge in cryptocurrency since April. Is this the end of the Ponzi scheme? Technology and ESG stocks are the second and third most over-owned, which may explain their recent flaccid performance.

Why is the Gold Hedge Working this Time? The Barbarous relic is finally giving investors the insurance and the downside hedge they need, after failing to do so during the last correction in February. That’s because interest rates were spiking in the winter but aren’t now. Interest rates are the enemy of all no-yielding assets, like precious metals.

Fed Hints of Early Rate Rise, trashing both stocks and bonds. The big one could be here, a complete collapse of the US Treasury bond market. I’m already running the biggest (TLT) shorts ever. We should fall from the current $135 to $120 by yearend. Sell all (TLT) rallies.

Lumber Futures Collapse by 40%. There goes your inflation. Now if only Biden will end the Trump-era import duty on Canadian lumber. It gives a big boost to the “transitory” camp, arguing that this is just a one or two-month spike spawned by the cover recovery. Soaring lumber prices had been a key factor igniting new home prices.

Applied Materials Knocks the Cover off the Ball, reporting blowout earnings. The semiconductors equipment maker has been the best performing chip-related stock of 2021, up 72%. (AMAT) sees a structural chip shortage lasting for years. DRAMs are speeding up, while NAN is slowing down. Customers are placing orders years in advance for the first time ever. A new $7.5 billion stock buyback plan and 9% dividend increase were announced. Buy (AMAT) on the dips.

My Ten-Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 7.48% gain so far in May on the heels of a spectacular 15.67% profit in April. That leaves me 50% invested and 50% cash. We actually have a shot at reaching a double-digit performance for the seventh month in a row.

My 2021 year-to-date performance soared to 67.24%. The Dow Average is up 11.79% so far in 2021.

We got another major meltdown last week followed by an immediate recovery. I used the dip to reinitiate new positions in the (TLT), Goldman Sachs (GS), and Berkshire Hathaway (BRKB) to replace ones that expired on the Friday options expiration.

That brings my 11-year total return to 489.79%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.90%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 124.92%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 590,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.

The coming week will be a weak one on the data front.

On Monday, May 24, at 8:30 AM, the Chicago Fed National Activity Index is released.

On Tuesday, May 25, at 10:00 AM, the S&P Case Shiller National Home Price Index for March is announced.

On Wednesday, May 26 at 8:30 PM, MBA Mortgage Applications are revealed.

On Thursday, May 27 at 8:30 AM, the Weekly Jobless Claims are Published. We also get a second estimate for the red hot Q2 GDP.

On Friday, May 28 at 8:30 AM, the even hotter Personal Spending for April is disclosed. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, as this pandemic winds down, I am reminded of a previous one in which I played a role in ending.

After a 30-year effort, the World Health organization was on the verge of wiping out smallpox, a scourge that had been ravaging the human race since its beginning. I have seen Egyptian mummies at the Museum of Cairo that showed the scarring that is the telltale evidence of smallpox, which is fatal in 50% of cases.

By the early 1970s, the dread disease was almost gone but still remained in some of the most remote parts of the world. So, they offered a reward to anyone who could find live cases.

To join the American Bicentennial Mt. Everest Expedition in 1976, I took a bus to the eastern edge of Katmandu and started walking. That was the furthest roads went in those days. It was only 150 miles to basecamp and a climb of 14,000 feet.

Some 100 miles in, I was hiking through a remote village, which was a page out of the 14^th century, back when families threw buckets of sewage into the street. The trail was lined with mud brick two-story homes with wood shingle roofs, with the second story overhanging the first.

As I entered the town, every child ran to their windows to wave, as visitors were so rare. Every smiling face was covered with healing but still bleeding smallpox sores. I was immune, since I received my childhood vaccination, but I kept walking.

Two months later, I returned to Katmandu and wrote to the WHO headquarters in Geneva about the location of the outbreak. A year later, I received a letter of thanks at my California address and a check for $100 telling me they had sent in a team to my valley in Nepal and vaccinated the entire population.

Some 15 years later, while on customer calls in Geneva for Morgan Stanley, I stopped by the WHO to visit a scientist I went to school with. It turned out I had become quite famous, as my smallpox cases in Nepal were the last ever discovered.

The WHO certified the world free of smallpox in 1980. The US stopped vaccinating children for smallpox in 1972, as the risks outweighed the reward.

Today, smallpox samples only exist at the CDC in Atlanta frozen in liquid nitrogen at minus 346 degrees Fahrenheit in a high-security level 5 biohazard storage facility. China and Russia probably have the same.

That’s because scientists fear that terrorists might dig up the bodies of some British sailors who were known to have died of smallpox in the 19^th century and were buried on the north coast of Greenland remaining frozen ever since. If you need a new smallpox vaccine, you have to start from somewhere.

As for me, I am now part of the 34% of Americans who remain immune to the disease. I’m glad I could play my own small part in ending it.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

On Mt. Everest, Smallpox-Free in 1976

Bitcoin

May 19, 2021

Tech Letter

Mad Hedge Technology Letter
May 19, 2021
Fiat Lux

Featured Trade:

(THE CURRENT STATE OF U.S. ECOMMERCE)
(AMZN), (WMT), (KR), (COST)

The Current State of U.S. eCommerce

Tech Letter

Was 2020 a one-hit-wonder for U.S. ecommerce sales?

Hardly so.

US retail ecommerce sales grew 33.6% in 2020, reaching $799.18 billion.

As the public health situation fizzles out, in-store shopping will refresh itself, and a share of consumer spending will revert away from retail and toward services like travel and live entertainment.

Consensus has it that U.S. ecommerce will grow 13.7% this year, reaching $908.73 billion, and although that would be a great year under normal circumstances, annualized growth of 13% appears pitiful compared to the pandemic numbers.

It was only at the beginning of 2020 that ecommerce was expected to grow 13.2% from 2019, but the health crisis ignited ecommerce sales to $799.18 billion.

Ecommerce growth from a much higher base is a hard endeavor as all the low-hanging fruit has been harvested and it’s just harder to push the needle higher.

What does this all mean?

Ecommerce represents a larger piece of the pie than ever before and that comes with greater influence.

I now expect ecommerce sales will account for 15.5% of the $5.856 trillion in total retail sales this year.

Ecommerce sales will surpass $1 trillion next year.

It also means that digital commerce has never been so strong in terms of a percentage growth basis, net total basis, and clout.

However, growth rates will need to moderate first before they can reaccelerate.

Looking at the financial year, look for sales to rise by a low single for the big-box retailer Walmart (WMT) showing that numbers are getting ahead of themselves.

Walmart is an accurate bellwether stock that gives us deep insight into the state of ecommerce, and they said it sees earnings rising by a high single-digit percent.

Guidance aside, Walmart had a great quarter.

Every segment performed well, and I am encouraged by traffic and grocery market share trends.

But customers clearly want to get out and shop which is why growth rates will most likely drop around 13% for ecommerce instead of staying north of 30%.

Walmart’s ecommerce continues to grow and stimulus in the U.S. had an outsized impact, and the second half has more uncertainty than a typical year because the reopening is a once-in-a-lifetime phenomenon and it’s hard to pinpoint the shake out.

Remember, there most likely will not be any broad-based stimulus payments in the 2^nd half of 2021 and 2022 that will be rolled into Walmart ecommerce sales.

Walmart is clearly chasing the leader of the pack Amazon.

Amazon is on track to become the largest retailer in the United States within the next four years, followed by the aforementioned Walmart and Kroger.

Kroger has been a fashionable pick amongst hedge fund managers in the beginning of 2021.

Amazon (AMZN) gross merchandise value sales (GMV) will top $631.6 billion by 2025, representing a compound annual growth rate of 14% between 2020 and 2025.

The same report showed us that Walmart’s ecommerce sales are set to grow at a five-year CAGR of 14.9% from $43.6 billion in 2020 to $87.5 billion in 2025, accounting for 16.7% of total retailer sales in 2025.

Ecommerce is the only channel that will grow in the next 5 years, everything else, such as offline retail will contract or go sideways at best.

It’s a death by a thousand cuts type of dilemma for anyone that isn’t in ecommerce.

Costco (COST), the fourth largest U.S. retailer, is expected to invest heavily in its digital business, with its online sales set to increase by 47% over the same period, reaching $15.3bn in 2025.

Over the next few years, Generation Z will age into adulthood and bring with them a digital wallet and firms will need to focus investment online and engage with the digital ecosystem in order to win market share.

Gen Z doesn’t use cash.

Online grocery is set to stay even in healthy times, but the pace of growth for online grocery will level off after the 2020 explosion.

Fresh grocery ecommerce is still expected to grow at 13.3% CAGR between now and 2025 which is why you see many retailers like Walmart investing in the fresh foods’ delivery business.

Habits are hard to break and it’s clear that digital add-ons are here to stay, and brands must cultivate digital platforms to win.

May 14, 2021

Tech Letter

Mad Hedge Technology Letter
May 14, 2021
Fiat Lux

Featured Trade:

(THE GOLDEN ERA OF CYBERSECURITY SPEND)
(PANW), (FTNT), (CRWD), (AMZN), (GOOGL), (ORCL), (MSFT), (IBM)

The Golden Era of Cybersecurity Spend

Tech Letter

The tech sector and the U.S. government are poised to engage in a more transactional relationship than ever before after the cybersecurity attack on Colonial Pipeline and the U.S. President’s executive order that followed it.

This doesn’t mean just servicing an email account, but this will incorporate broad-based networking cloud infrastructure from the top-down and the bits in between.

Technology is just getting too good, too fast, and applicable to the point that it allows nefarious actors to wield it in a way that could damage and permanently set back sovereign nations and global business.

Don’t get me wrong, this was already in the works, and U.S. President Joe Biden has signaled his intent to ramp up the IT spent, but this cyberattack that is causing gas hoarding in parts of South Eastern United States is just the event to really kick this initiative into overdrive.

Colonial Pipeline paid the almost $5 million ransom payment that will encourage similar type of behavior in the long-term.

The Cyberattack also means that the relationship between U.S. tech and government could swerve from net negative of a relentless anti-monopoly narrative to one in which big tech will be anointed as the saviors to the foreign cyber-criminals and paid handsomely to defend the operations of private and state U.S. business.

The latter sounds much better to Silicon Valley than the former and the bigwigs in Silicon Valley might ostensibly push this marketing dynamic of internet protection to save their bacon and get the regulatory heat off their back.

Polarizing figures such as U.S. Senator Elizabeth Warren have made it a point to bash big tech whenever she sees fit which is more often than not.

CEOs like Facebook’s Mark Zuckerberg have tried a disingenuous approach of blaming China’s marginal data privacy policies as a way to protect its Instagram business and prevent growth monster TikTok, a Chinese app, from cannibalizing its cash cow business.

The origin of the Colonial Attack is purportedly to be Russian which would offer more fuel to the fire and create a ready-made reason for U.S. government to pour incremental billions into Silicon Valley and its array of almost multi-trillion dollar heavy hitters while protecting their business moat.

This event also means Tesla is toast in China.

Officials in China banned Tesla vehicles from military bases and housing compounds amid concerns that potentially sensitive data from its onboard cameras could be collected and stored on Tesla servers.

Once the data privacy genie is out of the bottle, it’s hard to contain the fallout and Tesla will need to adopt a whack-a-mole strategy in China which often proves futile in the long-term.

The United States faces persistent and increasingly sophisticated malicious cyber campaigns that threaten the public sector, the private sector, and ultimately the American people’s security and privacy.

This is all just the beginning, a little taste of what’s on the menu.

Collaborating with U.S tech companies to improve its efforts to identify, deter, protect against, detect, and respond to these actions and actors is now a must.

The Federal Government must also carefully examine what occurred during any major cyber incident and apply lessons learned.

Incremental improvements will not offer the security Americans need; instead, the Federal Government needs to make bold changes and significant investments in order to defend the vital institutions that underpin the American way of life.

It’s the authorities’ job and to offer resources to protect and secure its computer systems, whether they are cloud-based, on-premise, or hybrid.

The scope of protection and security must include systems that process data (information technology (IT)) and those that run the vital machinery that ensures our safety (operational technology (OT)).

Contracts will be signed with IT and OT service providers to conduct an array of day-to-day functions on Federal Information Systems. These service providers, including cloud service providers, have unique access to and insight into cyber threat and incident information on Federal Information Systems.

Increasing the sharing of information about such threats, incidents, and risks, and enabling more effective defense of agencies’ systems and of information collected, processed, and maintained by or for the Government are necessary steps to accelerating incident deterrence, prevention, and response efforts.

The executive order signed by Biden shows that within 60 days, the Director of the Office of Management and Budget will hash out “language for contracting with IT and OT service providers and recommend updates.”

The U.S. must take decisive steps to modernize its approach to cybersecurity and must increase the Federal Government’s visibility into threats while protecting privacy and civil liberties.

Money will be spent to accelerate movement to secure cloud services, including Software as a Service (SaaS), Infrastructure as a Service (IaaS), and Platform as a Service (PaaS); centralize and streamline access to cybersecurity data to drive analytics for identifying and managing cybersecurity risks; and invest in both technology and personnel to match these modernization goals.

Prioritizing money spent on addressing “critical software” will translate into huge paydays to many cloud providers and not just the big guys.

Most recently, The Central Intelligence Agency awarded its long-awaited Commercial Cloud Enterprise, or C2E, contract to five companies—Amazon Web Services (AMZN), Microsoft (MSFT), Google (GOOGL), Oracle (ORCL), and IBM (IBM).

No doubt they will be vying for more government procurement contracts since they already have one hand in the honey jar.

At a lower level, readers should consider buying cybersecurity companies Fortinet (FTNT), Palo Alto Networks, Inc. (PANW), and CrowdStrike Holdings, Inc. (CRWD), but these smaller names come with more volatility.

This event really anoints the impending future as the golden era of IT cybersecurity spend and it will never go back to what it once was.

Paying for IT protection is here for the long haul and this goes for private companies and public institutions.

Nearly 80% of senior IT and IT security leaders believe their organizations lack sufficient protection against cyberattacks despite increased IT security investments made in 2020 to deal with distributed IT and work-from-home challenges, according to a new IDG Research Services survey commissioned by Insight Enterprises.

There will be a huge boom in IT cybersecurity spend because CEOs don’t want to be the idiot that allowed cybercriminals to hijack their whole business.

That’s the fastest way to end a management career.

Last time I checked, it’s a hard slog up the corporate ladder to land a prime CEO gig and it’s not getting any easier.

April 30, 2021

Tech Letter

Mad Hedge Technology Letter
April 30, 2021
Fiat Lux

Featured Trade:

(A QUARTER TO REMEMBER FOR TIM COOK)
(AMZN), (AAPL)

A Quarter to Remember for Tim Cook

Tech Letter

Investors looking to park their cash in an emerging tech stock have to reckon with the earnings’ strength of a company like Apple (AAPL).

Eventually, any artisanal tech company hoping to deliver you a 10 bagger will need to adjust their sights that at some point in their future, they will need to directly compete with an Apple or Amazon (AMZN).

That is what is so scary for the little guys.

There were bountiful eye-popping numbers serving as ironclad proof to investors that sticking with the Goliaths is the sure-fire approach to grind your way up to more wealth.

A tech company Apple’s size expanding quarterly revenue to almost $90 billion last quarter representing a 54% year-over-year growth rate is stuff of legends.

A 54% growth rate is what us analysts give a green light for regardless of the size of the company.

Many analysts like to resort to explaining the upcoming stifling of growth in big tech as the law of large numbers.

Apple has shown they can overcome almost anything.

And this was supposed to be the company in which they have a China issue.

The consensus is that Apple is a brilliant business with an even better operational model.

Three reasons why Apple is firing on all cylinders.

First, Apple’s installed base growth has accelerated and reached an all-time high across each major product category.

Second, the number of both transacting and paid accounts on Apple’s digital content stores reached a new all-time high during the March quarter, with paid accounts increasing double digits in each of our geographic segments.

Lastly, Apple’s paid subscriptions continued to show strong growth.

This trifecta of outperformance was why revenue in the March quarter broke a record of $89.6 billion an increase of over $31 billion or 54% from a year ago.

Management saw strong double digits in each product category, with all-time records for Mac and for services and March quarter records for iPhone and for wearables, home, and accessories.

Products revenue was a March quarter record of $72.7 billion, up 62% over a year ago.

Company gross margin was 42.5%, up 2.7% from last quarter driven by cost savings, a strong product mix and favorable foreign exchange.

iPhone revenues had a March quarter record of $47.9 billion, growing 66% year over year as the iPhone 12 family continued to be in high demand.

With unmatched 5G capability, the best camera system ever in an iPhone, and advanced durability from Ceramic Shield, this family of devices is popular with both upgraders and new customers alike.

In the US, the latest survey of consumers from 451 Research indicates customer satisfaction of over 99% for the iPhone 12 family.

Turning to services. Another all-time revenue record of $16.9 billion with all-time records for the App Store, cloud services, music, video, advertising, and payment services.

Apple’s new service offerings, Apple TV+, Apple Arcade, Apple News+, Apple Card, Apple Fitness+, as well as the Apple One bundle, continue to scale across users, content, and features and are contributing to overall services growth.

It was a quarter of sustained strength for wearables, homes, and accessories, which grew by 25% year over year.

Apple Watch is a global success story, and the category set March quarter records in each geographic segment, thanks to strong performance from both Apple Watch Series 6 and Apple Watch SE.

The Mac broke an all-time revenue record of $9.1 billion, up 70% over last year, and grew very strongly in each geographic segment.

This impressive performance was driven by the customer approval to new Macs powered by the M1 chip.

iPad performance was also outstanding with revenue of $7.8 billion, up 79%.

Where does Apple go from here?

First, hiring warm bodies and lots of them to try to meet all the extra incremental demand the company needs to satisfy in the near future.

Over the next five years, Apple will invest $430 billion, creating 20,000 jobs in the process.

The investments will support American innovation and drive economic benefits in every state, including a new North Carolina campus and job-creating investments in innovative fields like silicon engineering and 5G technology.

After hiring, Apple is laser-focused on shareholder return.

They were able to return nearly $23 billion to shareholders during the March quarter. This included 3.4 billion in dividends and equivalents and $19 billion through open market repurchases of 147 million Apple shares.

Apple’s board has authorized an additional $90 billion for share repurchases. They are also raising their dividend by 7% to $0.22 per share, and continue to plan for annual increases in the dividend going forward.

Lastly, management threw a damp towel on the feeling of success by removing guidance and talking about headwinds.

Management said that coming up, they would not offer specific financial guidance because of “continued uncertainty around the world in the near term.”

They also said that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior years.

Second, supply constraints will have a revenue impact of 3 to $4 billion in the June quarter meaning a lack of chips.

All in all, hard to be happier if you are an Apple long-term holder. This is a no-brainer buy and hold forever. Any substantial dip should be bought.

apple

April 30, 2021

Diary, Newsletter, Summary

Global Market Comments
April 30, 2021
Fiat Lux

Featured Trade:

(APRIL 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(PFE), (MRNA), (USO), (DAL), (TSLA), (CRSP), (ROM), (QQQ), (T), (NTLA),
(EDIT), (FARO), (PYPL), (COPX), (FCX), (IWM), (GOOG), (MSFT), (AMZN)

April 28 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the April 28 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA.

Q: There is talk of digital currencies being launched in the US. Is there any truth to that? How would that affect the dollar?

A: There is no truth to that; there is not even any serious discussion of digital currency at the US Treasury. My theory has always been that once Bitcoin works and is made theft-proof, the government will take it over and make that the digital US dollar. So far, Bitcoin has existed regulation-free; in fact, the IRS is counting on a trillion dollars in capital gains being taxed going forward in helping to address the budget deficit.

Q: If you have a choice, what’s the best vaccine to get?

A: The best vaccine is the one you can get the fastest. I know you’re a little slow on the rollout in Canada. Go for Pfizer (PFE) if you’re able to choose. You should avoid Moderna (MRNA) because 15% of people getting second shots have one-day symptoms after the second shot. But basically, you don’t get to choose, only kids get to choose because only Pfizer has done trials on people under the age of 21. So, if you take your kids in, they will all get Pfizer for sure.

Q: Should I buy Freeport McMoRan (FCX) here or wait for a bigger dip?

A: Freeport has just had a 25% move up in a week. I wouldn’t touch that. We put out the trade alert when it was in the mid $30s, and it's essentially at its maximum profit point now. So, you don't need to chase—wait for a bigger dip or a long sideways move before you get in.

Q: How do I trade copper if I don't do futures?

A: Buy (FCX), the largest copper producer in the US, and they have call options and LEAPS. By the way, if we do get another $5 dip in Freeport, which we just had, I would really do something like the (FCX) $45-$50 2023 LEAP. You can get 5 times your money on that.

Q: Time to buy oil stocks (USO) for the summer?

A: No, the big driver of oil right now is the pandemic in India. They are one of the world's largest consumers—you find out that most poor countries are using oil right now as they can’t afford the more expensive alternative sources of power. And when your biggest customer is looking at a billion corona cases, that’s bad for business. Remember, when you trade oil, you’re trading against a long-term bear trend.

Q: Would you buy Delta Airlines (DAL) at today’s prices?

A: Yes, I’m probably going to go run the numbers on today's call spread; I actually have 20% of cash left that I could spend. So that looks like a good choice—summer will be incredible for the entire airline industry now that they have all staved off bankruptcy. Ticket prices are going to start rising sharply with an impending severe aircraft shortage.

Q: What are your thoughts on the Buffet index which shows that stocks are more stretched vs GDP at any time vs 2000?

A: The trouble with those indicators is that they never anticipated A) the Fed buying $120 billion a month in US Treasury bonds, B) the Fed promising to keep interest rates at zero for three years, and C) an enormous bounce back from a once-in-a-hundred-year pandemic. That's why not just the Buffet Index but virtually all technical indicators have been worthless this year because they have shown that the market has been overbought for the last six months. And if you paid attention to your indicators, you were either left behind or you went short and lost your shirt. So, at a certain point, you have to ignore your technical indicators and your charts and just buy the damn market. The people who use that philosophy (and know when to use it, and it’s not always) are up 56% on the year.

Q: What trade categories are getting fantastic returns? It’s certainly not tech.

A: Well, we actually rotated out of tech last September and went into banks, industrial plays, and domestic recovery plays. And you can see in the stocks I just showed you in our model portfolio which one we’re getting the numbers from. Certainly, it was not tech; tech has only performed for the last four weeks and we jumped right back in that one also with positions in Microsoft (MSFT). So yes, it’s a constantly changing game; we’re getting rotations almost daily right now between major groups of stocks. The only way to play this kind of market is to listen to someone who’s been practicing for 52 years.

Q: I am 83 years old and have four grandchildren. I want to invest around $20,000 with each child. I was thinking of your bullish view on Tesla (TSLA) on a long-term investment. Do you agree?

A: If those were my grandchildren, I would give them each $20,000 worth of the ProShares Ultra Technology Fund (ROM), the 2x long technology ETF. Unless tech drops 50% from here, that stock will keep increasing at twice the rate of the fastest-growing sector in the market. I did something similar with my kids about 20 years ago and as a result, their college and retirement funds for their kids have risen 20 times. So that’s what I would do; I would never bet everything on a single stock, I would go for a basket of high-tech stocks, or the Invesco QQQ NASDAQ Trust (QQQ) if you don’t want the leverage.

Q: Do you like Amazon (AMZN) splitting?

A: I don’t think they’ll ever split. Jeff Bezos worked on Wall Street (with me at Morgan Stanley) and sees splits as nothing more than a paper shuffle, which it is. It’s more likely that he’ll break up the company into different segments because when they get to a $5 trillion market cap, it will just become too big to manage. Also, by breaking Amazon up into five companies—AWS, the store, healthcare, distribution, etc., —you’re getting a premium for those individual pieces, which would double the value of your existing holdings. So, if you hold Amazon stock, you want it to face an antitrust breakup because the flotation will double the value of your total holdings. That has happened several times in the past with other companies, like AT&T (T), which I also worked on.

Q: When is Tesla going to move and why is it going up with earnings up 74%?

A: Well, the stock moved up a healthy 46% going into the earnings; it’s a classic sell the news market. Most stocks are doing that this quarter and they did so last quarter as well. And Tesla also tends to move sideways for years and then have these explosive moves up. I think the next double or triple will come when they announce mass production of their solid-state batteries, which will be anywhere from 2 to 5 years off.

Q: How can I renew my subscription?

A: You can call customer support at 347-480-1034 or email support@madhedgefundtrader.com and I guarantee you someone will get back to you.

Q: Top gene-editing stock after CRISPR Therapeutics (CRSP)?

A: There are two of them: one is Intellia (NTLA); it’s actually done better than CRISPR lately. The second is Editas (EDIT) and you’ll find out that the same professionals, including the Nobel prize winner Jennifer Doudna here at Berkeley, rotate among all three of these, and the people who run them all know each other. They were all involved in the late 2000's fundamental research on CRISPR, and they’re all frenemies. So yes, it's a three-company industry, kind of like the cybersecurity industry.

Q: What about PayPal (PYPL)?

A: I would wait for the earnings since so many companies are selling off on their announcements. See if they sell off 3-5%, then you buy it for the next leg up. That is the game now.

Q: Do you like any 3D printing stocks like Faro Technologies (FARO)?

A: No, that’s too much of a niche area for me, I’m staying away. And that's becoming a commodity industry. When they were brand new years ago, they were red hot, now not so much.

Q: Do you see the chip companies continuing their bull run for the next few months?

A: I do. If anything, the chip shortage will get worse. Each EV uses about 100 chips, and they’re mostly the low-end $10 chips. Ford (F) said production of a million cars will be lost due to the chip shortage. Ford itself has 22,000 cars sitting in a lot that are fully assembled awaiting the chips. Tesla alone has $300 worth of chips just in its inverters, and there are two inverters in every car. So, when you go from production of 500,000 cars to a million in one year, that's literally billions of chips.

Q: The airlines are packed; what are your thoughts?

A: Yes, one of the best ways to invest is to invest in what you see. If you see airlines are packed, buy airline stocks. If you can’t hire anyone, you know the economy is booming.

Q: What about the Russel 2000 (IWM)?

A: We covered it; it looks like it wants to break out to new highs from here. By the way, there are only 1,500 stocks left in the Russell 2000 after the pandemic, mergers, and bankruptcies.

Q: Are there other ways to play copper out there like (FCX)?

A: Yes; one is the (COPX)— a pure copper futures ETF. However, be careful with pure metal ETFs of any kind because they have huge contangos and you could get a 50% move up in your commodity while your ETF goes down 50% over the same time. This happens all the time in oil and natural gas, and to a lesser degree in the metals, so be careful about that. Before you get into any of these alternative ETFs, look at the tracking history going back and I think you'll see you're much better off just buying (FCX).

Q: How long do you typically hold onto your 2-year LEAPS? Based on my research, the time decay starts to accelerate after about 3 months to one year on LEAPS.

A: Actually, with LEAPS, the reason I go out to two years is that the second year is almost free, there's almost no extra cost. And it gives you more breathing room for this thing to work. Usually, if I get my timing right, my LEAP stocks make big moves within the first three months; by then, the LEAP has doubled in value, and then you have to think about whether you should keep it or whether there are better LEAPS out there (which there almost always are). So, you sell it on a double, which only took a 30% move in the stock, or you may be committed to the company for the long term, like a Microsoft or an Amazon. And then you just run it through the expiration to get a 400% or 500% profit in two years. That is how you play the LEAP game.

Q: Are these recorded?

A: Yes, we record these and we post them on the website after about 2 hours. Just log into the site, go to “my account”, then select your subscription type (Global Trading Dispatch or Technology Letter), and “webinars” will be one of the button choices.

Q: Can you also sell calls on LEAPS?

A: Yes and the only place to do that is the US Treasury market (TLT). There you either want to be short calls far above the market, out two years, or you want to be long puts. And by the way, if you did something like a $120-$125 put spread out to January 2023, then you’re looking at making about a 400% gain. That is a bet that 20-year interest rates only go up a little bit more, to 2.00%. If you really want to bet the ranch, do something like a $120-$122 and you might get a 1000% return.

Q: What is the best LEAP to trade for Microsoft (MSFT)?

A: If you want to go out two years, I would do something like a June 2023 $290-$300 vertical bull call spread. There is an easy 67% profit in that one on only a 20% rise in the stock. I do front monthlies for the trade alert service, so we always have at least 10 or 20 trade alerts going out every month. And the one I currently have for is a deep in the money May $230-$240 vertical bull call spread which expires in 12 days.

Q: What is the best way to play Google (GOOG)?

A: Go 20% out of the money and buy a January 2023 $2,900-$3,000 vertical bull call spread for $20—that should make about 400%. If you want more specific advice on LEAPS, we have an opening for the Mad Hedge Concierge Service so send an email to support@madhedgefundtrader.com with subject line “concierge,” and we will reach out to you.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last ten years are there in all their glory.

Good Luck and Stay Healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader